Bailing Out Capitalism: Admitting Collapse
We have nationalised the losses from Bear Stearns
through a transfer of risk to the federal government’s
balance sheet and have now nationalised the losses
generated by Fannie’s and Freddie’s poor management
and functionally taken $5,000bn in debt
Fannie & Freddie's 'Socialism for Rich'
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The Federal Reserve and the Treasury have announced steps to shore up mortgage giants Fannie Mae and Freddie Mac, whose shares have plunged as losses from their mortgage holdings threatened their financial survival.
Congress has been asked to approve a sweeping rescue package that would inject billions of federal dollars into the the faltering companies. Separately, the Federal Reserve said that it would promote up to $300 billion dollars of short-term low interest loans to Fannie and Freddie.
AFL-CIO chief economist, Ron Blackwell, emphasized both the need to bail out Fannie and Freddie and the urgency of addressing the systemic problems that produced their collapse.
He says that the current system amounts to Socialism for the rich and Capitalism for the poor.
Allowing the Weak to Survive: Has America Become Socialist? [Source]
In a capitalist economy, losers are expected to take losses and winners to gain. Private enterprise is best able to allocate capital efficiently and, where it fails to do so, markets make adjustments and capital is reallocated to efficient users.
This basic tenet supports good and productive assets moving from the hands of weak players to stronger.
Where this is not possible, the US system gives the government a hand in fostering that move through an efficient process called bankruptcy or reorganisation.
This rule of markets and of law has always been the basis of our national supremacy in innovation and the reason ours was the world’s clear choice of a reserve currency. That was the world we lived in previously.
Our elected officials have repeatedly demonstrated that even equity holders, who are supposed to have the most subordinated claims on assets, cannot be allowed to take losses and instead believe we should all communally share in losses that result from poor allocation and risk management decisions.
We have nationalised the losses from Bear Stearns through a transfer of risk on to the federal government’s balance sheet and have now nationalised the losses generated by Fannie’s and Freddie’s poor management and functionally taken $5,000bn in obligations on to the government’s balance sheet.
This has been done even though every equity or debt offering of Fannie and Freddie explicitly states that these “are not guaranteed by the US and do not constitute an obligation of the US or any agency or instrumentality thereof other than” of Fannie or Freddie.
By the time we are finished with this tragic period in US economic history, the government is likely to have to choose whether to do the same for at least one more large bank, investment bank, bond insurer, mortgage insurer, multiple large regional bank, airline or car manufacturer.
Given the choices we have seen from officials, who obviously have little faith in the ability of capital markets or our system of law, we will see the continued nationalisation of bad assets, placing the burden on the shoulders of the already overburdened American taxpayer.
This commitment by misguided officials to print more money, to stoke the embers of inflation and to debase further our already hobbled currency, invites foreign investors to pick through our assets and buy our remaining strong businesses (Anheuser Busch) on the cheap.
As the strength of our remaining industries is further weakened, along with taxpayers’ buying power, it will become increasingly necessary, as a matter of survival, for American workers to demand increases in their wages.
While some might applaud the government’s policy action, it will prevent the rational and orderly repricing of over-inflated assets, ensure they remain overvalued, uneconomic and unaffordable to a population that will see an increasing percentage of their wages allocated for the support of our national debt.
We have done this without forcing the disgorgement of undeserved gains by managements and without replacing managements who are now controlling government “owned” businesses.
The same economists who have repeatedly argued efficient market theory have chosen this path. Instead of protecting those who made bad bets, we should use our rule of law to address the situation.
That would mean we allow weak players either to fail or to reorganise through an orderly transfer of good assets from weak hands to strong hands.
This would protect the US dollar and bring about the necessary repricing of assets to a sustainable equilibrium.
